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Does Excellence Pay Off? Evidence from the Wine Market

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  • Stefano Castriota

    () (Free University of Bolzano‐Bozen, Faculty of Economics and Management)

Abstract

Product excellence is often considered a fundamental variable to increase prices, revenues and firm performance. However, while the effect of excellence on consumers’ willingness to pay and on revenues is not surprising, that on profits and especially on profitability is uncertain. In fact, excellence is expensive since production costs and capital requirements often increase at an exponential rate and could end up overwhelming the positive effects due to the additional revenues. The degree of vertical integration could reduce quality and profitability in sectors where final goods are complex and require specialized suppliers, or rather increase them if the good is more simple and the control of the full chain solves the problems of asymmetric information. Using Italian data from the 2004-2009 Veronelli wine guides we show that excellence – as measured by wine quality – and vertical integration – as measured by private instead of cooperative ownership – do lead to higher prices of the bottles sold. However, in a second exercise we study the determinants of Italian wineries’ Return of Invested Capital (ROIC) using AIDA 2006-2015 data merged with additional information from telephone surveys and wine guides. Using a number of econometric techniques we obtain mixed results. We show that excellence – as measured by firm and collective reputation – is irrelevant. Vertical integration – as measured by in house production of grapes and wine – ensures higher profitability, but the most profitable firms are bottlers which deliver the worst products. The most important driver of profitability is firm size, which allows realizing economies of scale and implementing effective export strategies.

Suggested Citation

  • Stefano Castriota, 2018. "Does Excellence Pay Off? Evidence from the Wine Market," BEMPS - Bozen Economics & Management Paper Series BEMPS49, Faculty of Economics and Management at the Free University of Bozen.
  • Handle: RePEc:bzn:wpaper:bemps49
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    File URL: http://pro1.unibz.it/projects/economics/repec/bemps49.pdf
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    More about this item

    Keywords

    Profitability; excellence; vertical integration; reputation; quality; price; wine;

    JEL classification:

    • L11 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Production, Pricing, and Market Structure; Size Distribution of Firms
    • L14 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Transactional Relationships; Contracts and Reputation
    • L15 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Information and Product Quality
    • L23 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Organization of Production
    • L25 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Firm Performance

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